Cheap new competition is 'very good for consumers,' transportation expert says

NewLeaf will have a fleet of 737s operating out of seven Canadian airports starting in February 2016. (NewLeaf)

[UPDATE: As of 3:30 p.m. ET Monday, NewLeaf Travel is "temporarily postponing" sales of tickets for flights originally scheduled to start running on Feb. 12., pending a Canadian Transportation Agency (CTA) review of licensing regulations for Indirect Air Service Providers.

NewLeaf, rather than applying for a carrier licence, has partnered with the already licenced B.C.-based charter airline Flaire, which has agreed to provide planes, crew and maintenance. The CTA is deciding whether companies who bulk purchase all seats on planes and resell those seats to the public should be required to hold a licence.

NewLeaf says it aims to start selling tickets again by the spring.]

NewLeaf Travel and other discount airlines are shaking up Canada's air travel industry, and that's good news for all passengers, analysts say.

This proliferation of cheap flights has the potential to rattle an industry long dominated by Air Canada and WestJet, two companies that have developed a "cozy relationship" with similar prices and fees, says transportation economist Barry Prentice.

"The mere fact that we do have somebody coming in means that the airlines do have to recognize there is a credible threat there, and I think that's very good for consumers," Prentice, a professor at the University of Manitoba's Asper School of Business, told CBC News.

Price war

"We will vigorously defend our low fare leadership position in the market. Our success over the past 20 years demonstrates that Canadians love our unique combination of low fares and remarkable guest experience," WestJet spokeswoman Lauren Stewart said in an email.

Air Canada hasn't said yet whether it will follow suit, but spokesman Peter Fitzpatrick told CBC News: "We welcome competition and offer competitive pricing in every market we serve."

WestJet has dropped fares on select routes that compete with budget airline NewLeaf, like this Feb. 26 flight from Kelowna, B.C., to Saskatoon. (Screengrab/CBC)

The new low-cost carriers in Canada are copying the business models of successful budget airlines south of the border by offering cheap introductory fares and charging extra for things like printing a ticket, bringing aboard a carry-on or checking luggage.

"By unbundling the entire service, you get to choose what you want," NewLeaf CEO Jim Young said when he announced the airline's routes. "Ultra low-cost carriers are some of the most financially successful airlines in the world today."

Tickets are selling

It's too early to say whether Canadians will embrace this model, but they seem to be taking interest.

WOW spokeswoman Svana Fridriksdottir said its sales in Canada have been "a great success." She wouldn't give specific numbers, but says they've surpassed the booking rates of WOW's U.S. offerings, which had a load factor of 85 per cent throughout 2015.

Vancouver-based Jetlines and Calgary-based Jet Naked haven't started selling tickets yet, but both hope to begin operations this year — Jetlines within six months, and Jet Naked by spring.

Discount airline WOW Air, which has already launched its Canadian ad campaign, has unveiled a plan to fly from Montreal or Toronto to Iceland for $99 one way and travel to numerous destinations in Europe for $149. (WOW Air)

Still, Prentice doesn't think these newcomers pose a serious threat to Canada's established airlines. ​Both Air Canada and Westjet have posted soaring profits and announced international expansions in recent months.

Transportation analysis firm Raymond James described NewLeaf's entrance to the market as a "rather inauspicious opportunity with history stacking the odds against its long-term success."

Canada's airline industry is not kind to newcomers. Jetsgo suddenly ceased operations in March 2005, stranding an estimated 17,000 passengers right at the start of March break, one of the busiest travel times of the year. (Ryan Remiorz/Canadian Press)

In a research note to investors, Edward Gudewill and Ben Cherniavsky of Raymond James questioned the wisdom of opening a new airline amid a turbulent economy with a weak loonie and slumping oil prices.

"To the unemployed, it doesn't matter how low fares are," they wrote.

They also took issue with NewLeaf's winter launch and travel destinations.

"Launching a domestic-only operation in the middle of February seems like a tenuous proposition. Presumably cash will be very tight for a startup operation like this, which means it could be financially vulnerable for the first three months until seasonal demand picks up in Canada," they wrote.

"And as far as the strategy of flying to small, secondary markets is concerned, we remind investors that these are 'small' and 'secondary' for a reason."

Nevertheless, they predict savings across the board for travellers.

"Regardless of New Leaf's long-term success, a new entrant into the market will at the very least mess with the incumbents' pricing power, which has already been under considerable pressure."